MNI EUROPEAN MARKETS ANALYSIS: USD, Yields Track Higher, ISM In Focus Later

US TSYS: Tsys Futures Steady Ahead Of US ISM Data Later

• Treasury futures are little changed today, although off session lows. Volumes have been on the low side today, while earlier we did see a FV/WN block steepener trade.
• Tsys futures are trading below Friday's levels although slightly higher than the morning's opening levels with TUZ4 is -0-00⅛ at 103-24⅜ while TYZ4 is +0-02 at 113-17
• The 2yr yield is trading +1.3bps at 3.929%, while the 10yr is trading +1bps at 3.913%, with the 2s10s -0.74 at -1.796.
• August ISM Mfg is expected to rebound a touch to 47.5 according to BBG consensus, up from 45.8 in July.
• Projected rate cut pricing through year end has cooled 1bps vs. early Friday levels: Sep'24 cumulative -32.7bp (-33.0bp), Nov'24 cumulative -65.3bp (-65.7bp), Dec'24 -98.9bp (-100.4bp)
• Today, S&P Global US Manufacturing PMI following by Construction Spending & ISM Manufacturing
• We also have Treasury to auction $76 billion 3-month bills, $70 billion 6-month bills, $46 billion 1-year bills & $65 billion 42-day bills

JGBS: Futures Eyeing August 6 Lows, Reasonable Demand At 10yr Auction

JGB futures sit at fresh lows back to early August. JBU4 last at 144.37, -.23 compared with settlement levels. This puts August 6 lows at 144.30 within sight.

• Whilst some negative spill over from core futures moves has likely been at play, JGBs have underperformed the more resilient tone seen in US Tsy futures. US Tsy yields re-opened higher, but have pared gains as the session progressed.
• Risk off has bene evident in FX, parts of equity and metals commodity space, but hasn't seen much follow through to JGBs.
• The 10yr auction saw solid enough demand as well, with a bid to cover ratio of 3.17, versus 2.975 at the auction in early August. The tail was also down to 0.09 versus 0.50 at the prior auction.
• In the cash cash JGB space, we are up more than 1bps across most of the benchmarks, except the longer end. The 10yr was last around 0.93%. The 10yr swap rate was close to 0.92%.
• Looking ahead we have the service and composite PMI final reads for August tomorrow. On the supply front, we have the 30yr debt auction on Thursday.

AUSSIE BONDS: ACGBS Little Changed, Current Account Deficit Widens

ACGBs (YM 0.0 & XM +0.05) are little changed today, the 10yr briefly dripped below 4% hitting a 3.99% before paring some gains. Australia's, Q2’s current account deficit widened significantly more than expected at $10.7b compared with $6.3b in Q1, which was revised up.

• In Q2, the current account deficit widened significantly to $10.7b, driven by a $5b drop in the merchandise trade surplus and a larger primary income deficit, with the net export contribution to GDP falling to 0.2 percentage points. Public demand contributed 0.4 percentage points to growth, up from 0.2 in Q1. Goods exports decreased by 4.4% due to weaker iron ore and coal prices, while services exports rose by 6%, supported by the education sector.
• Cash ACGBs curve has tightened today, yields are trading 0.5-1bps lower, the 2yr is -0.7bps at 3.716%, while the 20yr is -0.7bps at 4%. The 2s10s is trading towards the top out of the monthly ranges at 27bps after hitting a low of 2bps June 27th.
• Swaps are about 2-4bps lower with the curve flattening.
• The bills strip is flat to 2 ticks higher
• RBA-dated OIS pricing has firmed 2bps over the day with 18bps of cuts now priced into year-end, while looking through to July next year we have firmed 4-8bps.
• Tomorrow, focus will be on 2Q GDP data

AUSTRALIAN DATA: Moderate Q2 Net Export Contribution As Public Demand Drives Growth

Q2’s current account deficit widened significantly more than expected at $10.7bn compared with $6.3bn in Q1, which was revised up. The net export contribution to GDP was 0.4pp lower than expected at 0.2pp after a 0.9pp detraction in Q1. Government finance statistics showed that public demand contributed 0.4pp to Q2 growth after 0.2pp. GDP prints on Wednesday.

• Q2’s current account deficit was the largest in six years driven by a $5bn narrowing in the merchandise trade surplus, impacted by lower commodity prices, and a widening in the primary income deficit. The services deficit narrowed $1bn.

Source: MNI - Market News/ABS

• The terms of trade fell 3.1% q/q and 3.9% y/y, as export prices fell 3% q/q and imports were unchanged.
• The volume of goods and services exports rose 0.5% q/q and 0.1% y/y in Q2, down from 3.3% y/y, with the increase driven by services (+5.6% q/q) while merchandise fell (-0.5% q/q). Import volumes declined 0.2% q/q to be up 5.2% y/y with the weakness concentrated in goods.
• Goods exports fell 4.4% q/q with both rural and non-rural weaker. Softer prices for iron ore and coal fell for a second consecutive quarter driving the 5.3% q/q & 8% y/y drop in non-rural shipments. Services rose 6% q/q though to be up 11.9% y/y, boosted by the education sector.
• Merchandise imports fell 0.6% q/q with the weakness in mining capex goods, consistent with recent soft investment data. Consumer goods rose 1% q/q after 8.9% in Q1 to be up 5.1% y/y. Services imports rose 1.1% q/q and slowed to 6% y/y.

Source: MNI - Market News/ABS

AUSTRALIAN DATA: Soft But Positive Q2 GDP Growth Expected

Q2 GDP is released on Wednesday and is forecast to post minimal growth of 0.2% q/q resulting in a the annual rate slowing to 0.9% from 1.1%, in line with the RBA’s August forecast. Growth is expected to be driven by public demand and net exports. While the Q2 data has come in soft, Q1 has been revised up for most of the partial data releases.

• Real retail sales contracted 0.3% q/q in Q2 and pointing to weak household consumption, but the latter includes services spending too, which may have remained positive especially for essential items. Government spending though looks like it was robust with the ABS saying that public consumption added 0.3pp and investment 0.1pp to growth.
• The Q2 private investment picture looked weak with capex down 2.2% q/q and construction volumes rising only 0.1% q/q. Inventories were muted rising only 0.1% q/q.
• The ABS said in the balance of payments release that net exports contributed 0.2 pp to Q2 growth, less than the 0.6pp forecast. Goods and services export volumes rose 0.5% q/q but have slowed considerably rising only 0.1% y/y after 7.5% y/y in Q2 2023. Imports fell 0.2% q/q but are running at a stronger annual rate of 5.2% y/y.
• GDP forecasts are concentrated around 0.2-0.3% q/q but range from 0% to 0.4% with ANZ at Bloomberg consensus and Westpac higher expecting 0.3%. Following this week’s partial Q2 data NAB has revised up its forecast by 0.2pp to 0.3% and CBA also 0.2pp to 0.4%.

NZGBS:  Richer, Erase Earlier Move To Close At Session's Best

NZGBs are richer today, erasing the earlier move to now trade at session's best levels. Yields initially traded 2-3bps higher, before reversing that move to trade 1-2bps lower on the day.

• The 2yr yield is -1.7bps at 4.095%, while the 10yr is -0.8bps at 4.286%
• Swap rates are 1-2bps lower, curve has flattened.
• RBNZ dated OIS pricing is little changed heading into year-end today, while we have cooled into next year 8-10bps.
• The New Zealand Treasury's latest update notes subdued economic activity but hints at a potential turning point as business optimism rises. While retail spending, employment, and construction remain weak, improved business confidence and expectations of further interest rate cuts offer some hope. However, vulnerable firms may continue to struggle if recovery is delayed.
• New Zealand reported a trade deficit of NZ$874m for the June quarter. Total trade reached NZ$53.2b, with exports rising 1.6% to NZ$26.2b and imports up 0.7% to NZ$27b. Services exports grew by 11%, driven by travel services, while goods exports declined by 1.5%. China remains New Zealand's top trade partner, followed by the US and Australia.
• Tomorrow we have ANZ Commodity Prices

NEW ZEALAND DATA: Terms Of Trade Recovering But Export Volumes Fall In Q2

NZ saw the second consecutive quarterly improvement in its merchandise terms of trade in Q2. It rose 2.1% q/q to be down 1.7% y/y after a trough of -10.7% y/y in Q4 2023, but there was a sharp deterioration in the services terms of trade of 8.6% q/q and 5.7% y/y. Net exports of goods are likely to weigh on Q2 GDP.

• Goods export prices rose 5.2% q/q driven by an 8% q/q rise in dairy, which is now up 0.3% y/y, the first positive in over a year. Import prices also rose but by less posting a 3.1% q/q increase to be up 0.7% y/y.
• Imported consumer inflation picked up again rising 1.4% q/q to 4% y/y up from 3.3% y/y in Q1 and the recent trough of 2.4% y/y in Q4 2023. While the disinflationary impact from goods prices seems to be past, price increases are still low compared to most of the post-Covid period.
• The services terms of trade fell 8.6% q/q and -5.7% y/y in Q2 due to services import prices rising 6.2% q/q but export prices falling 2.9% q/q.
• NZ Q2 GDP prints on September 19. So far it is looking weak with Q2 retail sales volumes down 1.2% q/q and Q2 merchandise export volumes decreasing 4.3% q/q while imports rose 3.1% q/q signalling a negative contribution from net exports of goods. We don’t have services yet. The RBNZ is forecasting a 0.5% q/q contraction in GDP.

Source: MNI - Market News/Refinitiv

FOREX: Equity Jitters/Lower Metals See AUD/JPY Down By Most Since Early August

A notable risk off tone has gripped G10 FX markets as the Tuesday Asia Pac has unfolded. The USD BBDXY index is up to 1237.00, around 0.15% above end Monday levels.

• The USD is up against all of the G10 currencies except the yen. USD/JPY is back to 146.45/50, around 0.30% in yen terms. Earlier highs in the pair were at 147.21.
• Regional equity losses have been evident for some markets, although losses are not beyond 0.50% at this stage. US equity futures also sit lower, led by tech (Nasdaq futures last off 0.34%).
• US yields were higher as cash Tsy trading resumed, although after being +2bps firmer, we are now back to +1bps in yield for the benchmarks. Tsys futures have drifted higher, likely finding some support from the risk off tone.
• AUD/USD is down around 0.80%, last near 0.6735/40. Outside of jittery equity markets, we have seen further downside in in iron ore, back sub $95/ton, off over 2%, Copper (CMX basis) is also down over 1% at this stage. Earlier data on Australia Q2 GDP partials showed a lower net export contribution of +0.2 (0.6 was the consensus), while public demand contributed 0.4ppt to Q2 growth. Q2 GDP prints tomorrow in Australia.
• AUD/JPY is down over 1%, last near 98.65/70. Recent highs rest close to 100.00. The pair hasn't fallen by more than 1% since Aug 5.
• NZD/USD is down around 0.65%, last back under 0.6200, with similar factors likely driving sentiment.
• Looking ahead, the BoE’s Breeden and ECB’s Buch & Jochnick appear. In the US, PMI/ISM for August and July construction spending print.

ASIA EQUITY FLOWS: Flows Muted Ahead Of Labor Day Holiday

• South Korea: South Korea experienced an inflow of $138m on Monday, resulting in a net outflow of $954m over the past five trading days, as investors again look to offload tech stocks. Year-to-date, the country has accumulated substantial inflows totaling $16.43b. The recent 5-day average shows an outflow of $191m, which is below the 20-day average of -$78m, while the 100-day average remains positive at $31m.
• Taiwan: Taiwan recorded an outflow of $70m on Monday, contributing to a net outflow of $1.69b over the past five trading days. Year-to-date, Taiwan has seen outflows totaling $9.77b. The 5-day average shows an outflow of $338m, which is below the 20-day average of $74m, and the 100-day average of -$144m.
• India: India saw an inflow of $179m on Friday, leading to a net inflow of $2.53b over the past five trading days. Year-to-date, India has accumulated inflows totaling $18.09b. The 5-day average is $604m, well above the 20-day average of $83m, and the 100-day average remains slightly positive at $38m.
• Indonesia: Indonesian equities recorded an inflow of $77m on Monday, contributing to a net inflow of $990m over the past five trading days, we have now had 17 of the past 18 days have been inflows. Year-to-date, Indonesia has accumulated inflows totaling $1.91b almost the entirety of that coming in August. The 5-day average inflow is $198m, above the 20-day average of $94m, and well above the 100-day average of $1m.
• Thailand: Thailand experienced an outflow of $43m on Monday, resulting in a net outflow of $25m over the past five trading days. Year-to-date, Thailand has seen outflows amounting to $3.49b. The 5-day average shows an outflow of $5m, compared to the 20-day average of -$8m, and the 100-day average of -$16m.
• Malaysia: Malaysia recorded an inflow of $96m on Monday, contributing to a net inflow of $347m over the past five trading days. Year-to-date, Malaysia has seen inflows totaling $696m. The 5-day average inflow is $69m, above both the 20-day average of $28m and the 100-day average of $9m.
• Philippines: The Philippines recorded an inflow of $7m on Monday, resulting in a net inflow of $46m over the past five trading days. Year-to-date, the Philippines has experienced outflows totaling $316m. The 5-day average inflow is $9m, above both the 20-day average of $8m and the 100-day average of -$5m.

Table 1: EM Asia Equity Flows

ASIA STOCKS: China & HK Equities Mixed, China To Defend Companies From Tariffs

Chinese and Hong Kong equity markets are mixed today, reflecting investor concerns about China's economic resilience and weak corporate earnings. The Shanghai Composite is 0.5% lower, influenced by continued contraction in China's manufacturing sector and disappointing data from property developers like New World Development Co. Meanwhile, in Hong Kong the HS is 0.35% lower after Cathay Pacific's shares declined following an engine inspection issue with its Airbus A350 fleet. Investors remain cautious, awaiting further economic data and potential government support measures.

• Hon Kong equity markets are mixed today, banks are the worst performing in the region with the HS Banks Index has dropping 2.70% & the HS Financials Index down 2%, HS Tech Index is 0.40% higher, Mainland Property Index is 1.10% higher although the HS Property Index is down 0.50%.
• China onshore markets are also mixed, the CSI300 is unchanged for the day, CSI 300 Tech is 0.40% higher, CSI 300 Real Estate Index up 1%, while the CSI New EV Index is up 2.10% after headlines that China vows to defund Chinese EV firms rights from Canada EV tariffs.
• China has threatened severe economic retaliation against Japan if Tokyo imposes further restrictions on sales and servicing of chipmaking equipment to Chinese firms, heightening tensions amid US-led efforts to limit China's access to advanced technology. Japan's concerns include potential cuts to critical mineral supplies essential for its automotive industry, with companies like Toyota deeply involved in the discussions. Despite US pressure, Japan is weighing its own strategic interests and considering the implications of tighter export controls.
• Tomorrow, we have Caixin China PMI Composite & S&P Global Hong Kong PMI

OIL: Crude Range Trading As Supply Disruptions Offset Demand Worries

Oil prices have been range trading today with other commodity prices lower and equities mixed. The impact of further disruptions to Libyan output has been offset by continued concerns re China demand. WTI is up 0.5% to $73.91/bbl after a high of $74.16 and low of $73.55. In contrast, Brent is down 0.3% to $77.26/bbl and has traded between $77.06 and $77.48. The USD index is 0.2% higher.

• The US is putting together further sanctions on Venezuela following its disputed election results and arrest warrant for an opposition leader. The US had eased oil and gas sanctions last year on the condition of free and fair elections, but had reinstated them after popular figures were not allowed to run as candidates.
• Libya declared force majeure, to protect it contractually from an unforeseen event, at another important oilfield. The political dispute between the country’s two governments over the control of the central bank which manages oil revenues has resulted in the almost 1mbd reduction in Libyan output.
• US manufacturing PMI/ISM for August and July construction spending are released and BoE’s Breeden and ECB’s Buch & Jochnick appear.

GOLD: Gold’s Shine Coming Off Ahead of US Data This Week

• The US data filled week will likely give a clearer indication as to the path for monetary policy and hence gold’s fortune for the rest of 2024.
• Gold was down at $2,495 in the morning trading session in Asia from Monday’s close of $2,499.51.
• If the downward trend continues it would see gold finishing down three days in a row, having hit peaks in August.
• However Gold remains over 20% up year to date.
• This week’s data will culminate in the Non-Farm Payrolls on Friday when markets will be able to assess the likely path and pace for interest rates.
• Given gold is not interest bearing, typically lower rates are a bullish signal for bullion’s performance.
• Historical analysis shows that September can often be a challenging month for Gold as investors and traders alike return from summer break, reassessing their portfolios.
• This year the market is braced for not only the resumption post holidays, but for a Federal Reserve decision that could shape financial markets globally for the rest of the year.

SOUTH KOREA: South Korean CPI Provides BOK with Room to Move on Rates.

• Korea’s CPI moderated in August, taking pressure off the Central Bank.
• The 2% yoy price rise brings the CPI back in line with the BOK target.
• Today’s print represents a meaningful decline from the prior month’s print of 2.6%.
• Consensus from economists was for a 2.1% yoy increase.
• BOK officials have been under pressure from government spokespeople on rates since the last meeting where rates remained unchanged.
• Rates are generally considered in restrictive territory but with four of seven voting members in favour of a cut, the tide appears to be turning.
• BOK’s focus has been on Seoul house prices as a key indicator for monetary policy.
• The government has taken steps to address house prices with announcements on new home supply and a focus on lending standards from the key banks.
• The BOK has maintained its rate at 3.5% since the beginning of 2023 yet with consumer activity declining in the domestic economy, will potentially be looking for opportunities to cut rates into year end.

ASIA FX: Weaker Since Month End, But All USD/Asia Pairs (Except INR) Still Sub 20-day EMA Resistance

The Asia versus dollar index sits off end August highs. The Bloomberg index last near 92.33, after ending August at 92.78, fresh highs back to early January of this year.

• Asian currencies moving away from highs versus the USD (or USD/Asia pairs up from lows) has likely reflected several factors. Firstly, US yield sentiment has stabilized to a degree, amid resilient US data outcomes. Looking forward, a lot will depend on how US payrolls unfolds later this week, given the emphasis Fed Chair Powell put on the labor market at his recent Jackson Hole Speech.
• Clear of month end may have also reduced some exporter related USD selling, which has likely been a feature in markets like USD/CNH through the tail end of August.
• Renewed China growth amid property woes and underperforming manufacturing PMI (official index) has hurt China asset sentiment in recent sessions, which may be spilling over to the rest of the region to some degree.
• Coming back from oversold conditions for some USD/Asia pairs is also potential encouraging some squaring of USD shorts.
• Still, as the table below shows, outside of USD/INR, all USD/Asia pairs are sub their respective 20-day EMAs. The largest percentage deviation rests with some South East Asian (SEA) currencies, rather than North Asia (where USD/TWD is back close to this resistance point).
• SEA FX is arguably more sensitive to US yield developments/Fed outlook. This brings extra focus onto the US NFP report this Friday.

Table 1: USD/Asia Pairs -Deviation From 20-day EMA

Source: MNI - Market News/Bloomberg

CHINA RATES: China Bond Bulls Taking Charge of the Front End.

• The short end of the China Government Bond curve has continued to rally with new measures from authorities providing support and economic data softening.
• The 2-year government bond closed yesterday at 1.48%, on new lows for the year yet above the lows of April 2020.
• The move lower was echoed in 5-year government bonds.
• On Saturday a China data release showed that manufacturing in China is moderating, a likely precursor to further policy action.
• Last week saw the PBOC intervening in bond markets in action appeared focused on the steepness of the curve.
• The PBOC advised that it had undertaken purchases in the short end of the government bond curve whilst selling longer dated ones in August.
• The Central Bank has indicated that in August, it purchased CNY100bn of government bonds.
• These actions appear focused on reducing funding costs to support the economy, ahead of any potential cut in policy rates.
• With the outlook for the Chinese economy uncertain, it is likely that we will see ongoing intervention in a variety of measures into year end with the bond bulls remaining in charge for now.